How can you get strangers to provide you with financing?

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To go from a small to a medium-sized business, companies need to raise a lot of the financing. In this video, explore how reliable financial reports help convince investors to take a risk on your growing business.

- Okay, Jim, let's imagine that we want to buythis building and convert it into a largeice cream production facility.How much do you think it would costto get our ice cream business up and running?- [Jim] Well, if we want to do it right,buying the land, building and equipmentand initial stock of raw materials,that's going to cost us a hundred million dollars.- See, I can see it in my mind's eye,the gleaming, stainless steel mixing vats.The happy employees wearing white clothes,white shoes, white capsto emphasize the cleanliness of our facility.The huge freezer storage roomstacked with delicious ice cream--- Yeah, that's a great vision,But back to reality.

Where would we get the hundred million dollarsin financing to make this happen?If we want to buy a hundred million dollarsin ice cream production assets,then we're going to need a hundred million dollarsin money from somewhere to buy them.- That's why I included you as one of the partners.Surely, you've got a hundred million dollarstucked away somewhere.- Uh, not quite.And I don't think we can expect our friends and familyto collectively come up with a hundred million dollarsto invest in our business.- Well, couldn't we go door-to-doorin your fancy neighborhood and ask your neighborsto invest in the extra money we need?- Yeah, we could do that,but the reality is, if we want to gofrom small-size business peopleto medium-size business peoplewith assets of a hundred million dollars,we're almost certainly going to have to raisea lot of financing from strangers.

- From strangers?- [Jim] Yeah, strangers.A bank or a group of banks.Venture capitalists who are freelance investorswilling to take a risk on a growing businessin exchange for part ownership.- You know, we might even consider going public.To go public in the United States,you must file a business plan called a prospectuswith the Securities and Exchange Commission, the SEC.- Correct, and once approved by the SEC,you can issue ownership shares to anyone in the world.In essence, anyone in the world can now becomeyour business partner by buying shares in your corporation.

- Now remember, corporation is merelya collection of hundreds, or thousands, or millionsof individuals who each own a portion of the company.- Now the key thing is that the vast majorityof the shareholders are strangers to each otherand are strangers to the peoplewho are running the company on a day-to-day basis.- So how could we convince strangers,either banks or shareholders, to give us 100 million dollarsfor our ice cream business?- And this brings us back to financial records.We must provide potential investorsmost of them complete strangers to us,with summary financial statementsto give them a concrete ideaof what they would be investing inif they invested in our ice cream company.

- A key point here is that new businessescannot get financing in a reasonable waywithout financial statements.In short, financial statements are essentialto the modern functioning of our economywhen we don't raise capital from friends and family,but instead we are typically raising capital from strangers.- Reliable financial reports are what make it possibleto turn the dreams of entrepreneursinto the reality of actual businesses.- I like that.Financial reports turn dreams into reality.- Now the word reliable is important here.

Do we have an incentive to make our financial statementslook a little better than reality?Of course we do.And strangers don't knowwhether they can trust our character or not.- This is where external auditing comes in.And to my knowledge,in every country in the world that allows companiesto issue ownership shares to the public,the government regulators also requirethe company financial reports be auditedby an independent, outside, third-party auditor.- Now these external auditors review the financial reportsand the underlying recordkeeping systemand aggressively question the assumptionsand estimates made in preparing the financial reports.

- Correct.Now we're going to talk more about auditors in detail later.- Now reliable financial reportsmake it possible for entrepreneursto convince complete strangers to providethe financing to turn their entrepreneurial dreamsinto reality.

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Released

2/14/2018

Bookkeeping—financial record keeping—is the cornerstone of a healthy business. Accurate records ensure you can make intelligent decisions, stay on the right side of the IRS, and demonstrate the value of your business should you decide to sell it. Join accounting professors Jim and Kay Stice for this overview of financial record keeping. Learn how to create forecasts and a quantitative business plan, capture rudimentary business data such as sales and expenses, understand income tax reporting, and prepare detailed reports to help you attract financing from banks and other investors. This is an introductory course—no prior accounting knowledge is required. After taking it, you should understand the basics of this critical business function.

Topics include:

Creating a qualitative business plan

Forecasting sales and expenses

Capturing basic business data

Understanding income taxes

Preparing financial reports for auditors, investors, and other outside parties